I had the opportunity yesterday to sit down in an tight-knit group meeting with Georgia’s Lt. Governor Casey Cagle.  The casual sit down in the Lt. Governor’s office included a couple of Georgia’s political bloggers and new media writers – I happened to be able to tag along, and I greatly appreciated the invitation. 

I had met the Lt. Governor before; however, this was the first time I was able to sit down with him since being elected and talk policy (and a little politics).  In fact, the last time I interacted with Cagle was during the campaign, when indeed, I stayed at a healthy distance, because I was ardently campaigning against his primary opponent, whom he beat by ten points. 

That’s all ancient history now, and the Lt. Governor is clearly looking ahead to his future political options in the State.  It’s no secret that Cagle is a option to run for Governor when Sonny Perdue’s term ends (most people think he’s the option and heir apparent).  I, for one, hope he does go this route, and personally, I believe he will. 

After talking to him for about an hour or so where pretty much anything was on the table, I feel even more confident that he’s considering the best route to persue the Governor’s Mansion.  Moreover, after these discussions with him, I am also more confident in his ability to do so. 

It wasn’t that I doubted his ability before this meeting; I just didn’t have a lot of details or information to say without a doubt he’s the one.  But, I was very impressed after walking out of the meeting yesterday.  I was first impressed with his overall political acumen.  He comes across as the quintessential good ole boy politician from the country who’s ‘making things happen’ in government, minus the negative sentiments that sometimes go along with that picture.  He truly is just a good guy and the fact that he is very personable makes him very effective face-to-face.  One can easily see why Georgian voters would connect with Casey Cagle over his previous opponent. 

Another thing that impressed me was his knowledge of the issues.  Now, keep in mind, I have been around politicians, elected officials, appointees, and policy experts my entire life.  Most people in politics have ‘either or,’ meaning they are either personable (i.e., they connect with voters) or they are very knowledgeable about the issues.  Rarely (it seems) do you find someone that has both of these traits.  Newt Gingrich does.  Casey Cagle does as well. 

Cagle will set down and talk to you like you’re two long lost buddies catching up over fried chicken at Greenwoods, but his knowledge of the issues makes you think he’s spent lifetimes of work experience in a variety of policy areas.  It is this critical component that makes me confident there’s still a lot of Casey Cagle to come for Georgia. 

Finally, in the meeting, we did manage to get into some substance on some of the issues that the Lt. Governor has been working on.  Education, being his key initiative, took up a significant portion of our discussion.  Cagle is very proud of his efforts to boost education in Georgia, and rightfully so, considering we have consistently been at or near the bottom of the rankings as far as education goes for a number of years. 

One of Cagle’s projects has to do with the development of ‘Career Academies,’ which essentially are vocational schools that increase education opportunities for either the underpriveledged or those that struggled with traditional education systems.  Being the economist out of the group, I was curious what kind of data was out there showing the effectiveness of these programs.  Since the program is less than two years old, there isn’t a great of empirical evidence as to the effectiveness of these programs, but the Lt. Governor did mention one snippet.  Apparently, personal income for students that graduated from Career Academies was approximately fifty percent higher than those that did complete these programs or traditional schooling.  These students, on average, are earning around $33,000 a year, which is significantly higher than Georgia’s median income, as well as the US average.  These are good results, needless to say.  Further, something like 100% of the students that completed the Career Academies entered the workforce with full-time jobs. 

My question was if there has been any overall impact on the State’s unemployment rate and he said it is still too early to tell, which I agree.  However, this would make for an interesting study, i.e., the correlation between successful completion of the Career Academies and variation in the State unemployment rate.  There are a number of other variables that could be included to build what could be a helpful model that potentially would provide compelling data about the efficacy of the Lt. Governor’s education programmes. 

Another topic of discussion at the meeting related to the general method that the State Government does business on a day-to-day basis.  The Lt. Governor expressed his serious concern for the amount of corruption and just overall inadequate management that runs rampant throughout Georgia’s State and local government entities.  While many Georgian politicians in recent years have been campaigning on a platform of ‘cleaning up the government,’ it appears as though Cagle is serious about following through with this, albeit with the understanding that these types of changes take time and you have to tread lightly (I told you he’s a good politician). 

Overall, as I said, I was very impressed with what the Lt. Governor had to say.  He comes across as a strategic thinker, but he’s also the type of good ole Georgia boy that could connect with both the C-suite from Atlanta’s corporations and peanut farmers from Albany like he’s best friends with both. 

I hope to be hearing more from and talking more with Lt. Governor Cagle, for my own benefit, but also for the benefit of those interested in the future of Georgia’s politics.

[UPDATE] You can get more information on these companies and Coker’s investments on the Coker Capital site. 

Since it has been so incredibly busy lately, I have been late on postings.  In addition to being more of a full-time student than anything for the next six weeks (to finish my masters), I have also been involved in two new investment deals, which we recently just closed.

Coker Capital closed two transactions this week, which have been the culmination of months of due diligence for two deals that we have been very excited to announce.  These investments included two distinct deal structures and two very separate types of businesses (i.e., totally different markets).

The first is Body Surface Translations.  BST is a very early stage company; so early that we are the first investors, first shareholders (outside the founder) and early enough that the company doesn’t even have a website yet, thus no link.  We aren’t, however, the first group to get involved in this great opportunity – we’re just the first to officially take advantage of capitalizing on it. 

BST is structured around using proprietary technology in the agricultural and veterinary sectors.  Again, this is an early product, so we’re not even to the point where we want to openly discuss the technology itself of what we’re trying to accomplish.  We just want to leave it as being an advanced technology that will revolutionize many processes within the ag space.  We see this as an opportunity, based on the fact that 1) the agriculture sector is not one with a great amount of technology adopted at this point; 2) commodity prices and the cost of operating in this space are proving to be very challenging for institutional and industrial farming firms to maintain high profitability; and, 3) this company/product aims to address a very specific need with direct benefit on our target constituency that presents hundeds of millions of dollars in market cap opportunity.  I realize I am being very vague here, but again, this is a very early stage relationship, and although it is now finalized and moving forward, we are not yet in a position to start broadcasting the technology to the world, even though that will come in the near future.  Also, Coker Capital did receive a seat on BST’s Board of Directors. 

The second deal was very different from the first.  Therakine is a bio-tech/med-tech company, where Coker Capital made up the final portion of it’s angel investment round.  We were the first formal firm involved in the investment of the company and obtained one board observer seat on Therakine’s Board of Directors.  Without going into too much detail on the deal’s structure, it was very different from the straight-up equity deal that we engaged with BST. 

Therakine’s three product portfolio is currently entering the formal product development phase, where the capital provided will be applied to the necessary clinical lab testing programs.  For more information on Therakine’s product pipeline, feel free to check out their website, but in brief, these products are essentially pharma delivery devices focused on therapeutics of inflammatory eye disease. 

Needless to say, we are very excited about both of these deals, which you can hear more about in the near future on the soon-to-launch brand new Coker Capital website.  Stay tuned …

If you know more or if you are a regular reader hear, you know that I serve on the Board of Directors of Right Steps, a great non-profit NGO that provides human rescue and development services in Nigeria.  One of my goals since joining the Board has been to enhance our online presence and outreach initiatives for development purposes in the U.S. and abroad.  Operating an organization in Africa is very challenging, thus every little bit of support we get goes a long ways towards helping women and children in this poverty-dominated region.

I have been working diligently on the Right Steps website.  We have never had a great site.  The first site was essentially just a brochure holding site.  Last year, I had a marginal upgrade done, where we just put some basic content, again very much just brochure, on a Microsoft Office Live hosted page. 

Recently, I have been looking at options to do an affordable, yet good looking site that helps communicate our message more efficiently, specifically through a blog presentation.  Thus, I decided to keep it simple and do something that is becoming more commonplace in the world of online activity.  I decided to host the website completely in blog format. 

Since I am a big fan of WordPress, I began to transfer all of our content to the new ’site’ hosted at WordPress.  I have also cleaned up some issues that have been lingering for years now related to our domains for the site.  At this point, we have activated both Rightsteps.org and Rightstepsinc.org to go to our new site.  I am very relieved to have this done. 

The site is still a work in progress, but in the next couple of weeks, we will have our unique graphic presentation up on the site, as well as an active blog with ample information for our supporters all over the world.  Instead of worrying about newsletters being mailed every quarter or so, the new Rightsteps.org will provide updated and current information to find out what is happening with Right Steps and our people on the ground in Nigeria whenever our supporters want it. 

For more information, visit our work in progress website at www.rightsteps.org.

Fred Wilson from Union Square Ventures, had a recent post on his blog that I thought deserved a comment of my own, about ‘Venture Fund Economics.’  What Wilson said in his post is a much more aptly worded way of what I was trying to say in this previous post about venture investing.  From that post a few months ago …

… [T]he investment strategy is very simple.  The managers will put the $250mm to work in let’s just say an average of $5mm investments.  This means they will do a total of 50 deals for the fund in efforts to allocate all of the capital. 

With an exit strategy of either an acquisition or IPO, you assume a 10-15% (many times higher, but also lower) success rate of your portfolio companies.  Let’s just say 10% of your portfolio companies make it to a successful IPO priced in the $2.5 billion range.  Investing $5 million in the company, you probably came in at a series A and you could have retained about 10% equity ownership in the company after being dilluted from subsequent rounds of financing.  Ultimately, you own roughly 10% of five companies that have a market cap of greater than $2.5 billion and are priced as much when hitting the public capital markets.  That turns out to be pretty nice returns on your original $250 million worth of capital.  What happens to the other companies you’ve been spending all that time with for the past few years.  Nothing.  They’re an afterthought. 

I think this is an appropriate topic for anyone aspiring to get into venture capital investing, because if you will read many of the blogs and material out there from VC’s and mainstream media, they will undoubtedly attempt to overcomplicate this process, ultimately trying to make it appear much more complex than it really is. 

I don’t want to minimize the level of complication that can go into venture deals.  Indeed, some deals become very complicated, many times to the detriment of the entrepreneur and investors.  However, the macro view of the venture investment landscape is very straightforward, and this should be understood. 

The reason I am pointing this out now is because I have been reading and thinking a lot lately about the attitude that people outside the VC community, as well as many people within this space, have towards venture investing in general.  It is gravely misunderstood, the primary reason for which is due to peoples’ attempts to overcomplicate the processes and structure involved in venture capital.

Another reason this is relevant is because I believe some of the dynamics are changing.  As we have already seen the number of venture deals and IPO’s decline, allegedly as a result of the credit crunch, I believe the boom of venture deals, and thus the returns, will continue to see some declines in the next few years.  Again, this is very simple.  Institutional investors’ capital is across the board lower.  Therefore, the allocations that will go to private equity, and specifically to venture stage deals, will decrease.  So, those billions of dollars that were almost wantonly being allocated to venture firms in the past three to five years will inevitably go down.

Will this hurt venture capital?  I do not believe so.  Many of the VC’s out there today are more concerned with managing their current funds and LP’s, making sure their active investments do not go bust.  Raising capital for new funds has become a bottom of the list item for now. 

A more important question to consider, though, is how this will effect the abililty of new ventures to raise capital and thus grow to become competitive firms, eventually launching into the public markets?  I have argued before that I think we will see the number of venture-backed IPO’s come back around as the economy and markets rebound over the next few years.  This is a cyclical thing.  However, there’s a simple process here, thus a potentially simple cause and effect relationship between the lower amounts of venture capital leading to declines in the amount of new ventures funded, ultimately resulting in the number of venture-backed IPO’s remaining low. 

So, venture capitalists can attempt to make the process complicated and they can come up with all kinds of speculation as to why and how the VC space will evolve over the next couple of years.  However, what the markets need to understand is that the true ‘economics’ of venture capital can tell us a lot about where VC is going and what the future will look like for the major VC players.  My hypothesis:  we will see a lot of the old players bow out and new players come up to take advantage of a new stage in this evolving marketplace.

Incoming freshmen that will soon be moving out of their parents’ homes and into dormrooms throughout the U.S. are more likely to be concerned with things like fitting in to college life, meeting the demands of higher level curriculum and perhaps making social connections that will allow them to enjoy their college life.  Most have no real concern about what kind of weapons they will use to harrass faculty when grades are not granted as wished. 

The Economist has a recent report on yet another developing epidemic in Nigeria, where incoming students are dealing with a growing crisis of miltant ’social groups,’ i.e., fraternities, clubs, etc, which use various means of violence to inflict terror on different targets, including faculty, professors, administration and other students. 

Universities have long been considered a breeding ground for the next generation of terror-inflicting militant groups, aiming to gain control and influence over impressionable youth who are facing grim decisions and limited options for prospering in the current state of their developing countries.  This is nothing new; however, in Nigeria, the situation has deteriorated throughout the country, so this escalating crisis is hitting hard at a time where further negative developments could result in drastic effects for local communities. 

In my series on Africa, I have written a number of times about developing situations in this region, especially focusing on Nigeria.  I have a keen interest in Nigeria, first because my wife and I spent time there a few years ago working with an NGO for which I now serve on their Board of Directors; and, second, because I have studied the economics of sub-Saharan Africa for a number of years, and since Nigeria represents the largest oil producing country on the continent, what happens in this country and region has significant effects on daily activity in the global markets.  More on this to come …

Check out the front page of Private Equity Professional Digest for an updated version of my article that provides detailed analysis of private equity investments in the life sciences sector.  You can access the original version here, which was published on Reiboldt.com a few weeks ago.  While you’re at it, consider a subscription!  By the way, I am not in any way compensated from subscriptions or anything related to the above linked website; it’s just a good resource on private equity news and information.

Due to my schedule heating up with exams approaching, I will be focusing on being a full-time student, so I can finish my masters program strong over the next two months.  Thus, my articles will likely be a little light, but I will be back in full force upon completion of my program.  As always, feel free to contact me if you have any questions regarding this site.

I have written before on the increasing concerns that people within the venture capital space have in regards to the dramatic decline in venture-backed IPO’s in 2008.  Ultimately, there’s no surprise that the markets don’t want to put billions of dollars towards start-ups with questionable valuations and little performance.  VC’s should expect this, considering the state of the capital markets today. 

However, this trend does not necessarily mean the overall private equity – specifically venture capital – markets are performing poorly.  Indeed, in the online edition of BusinessWeek, Spence Ante had a piece entitled “What Credit Crunch?” where he illustrated that, according to data from Thomson Reuters, the amount of capital raised by funds increased 3% since last year. 

Some 71 venture capital funds raised $9.1 billion in the second quarter of 2008, up 3% from the year-ago quarter, according to a survey released July 14 by Thomson Reuters and the National Venture Capital Assn. Investments in information technology, life sciences, and environmental technologies continue to drive the market.

Despite the slowing IPO market, the amount of capital being allocated by institutional investors and high-net worth individuals to investments in start-up ventures is increasing dramatically year-over-year.  The lower number of VC-backed IPO’s is more of an outcome of the economic cycle; whereas, the overall trends show the growth in venture capital to be increasing significantly compared to previous years. 

There are other trends at play in the overall private equity market as well. For instance, the amount of activity amongst buyout funds (often referred to as LBO firms or generally ‘private equity’ firms’ has steadily increased since the 1970’s, peaking during the buyout boom in 2007.  This will likely continue to increase.  However, for venture stage private equity firms (i.e., typical VC’s), the amount of assets under management has increased dramatically within the last ten years. 

(NVCA Yearbook 2008)

Therefore, the fact that the amount of investment capital that has been allocated to venture capital funds has increased, despite the state of the capital markets, is not that surprising.  Indeed, the 3% could even be somewhat low, considering the historical growth over the last ten years; however, due to the state of the credit markets, as well as the fizzling of the buyout boom, any growth in this space is good, albeit not surprising. 

How does this correlate to the low number of venture-backed companies going public?  I think this is much simpler than what some people are making it out to be.  Firstly, making anything happen in the public capital markets right now is a challenge, so unless your start-up has exceptional performance, growth and value to show, it will likely not be the best time to look to the public markets for raising capital. 

Second, as I previously pointed out, the state of the public markets has to do with the economic cycle; therefore, the trends in the private equity sector should not be greatly affected by short-term fluctuations in the markets.  I argued in a previous article that this actually gives many start-up ventures an advantage, assuming they have had good growth and can maintain value and cashflow, because if these firms are performing well, they can afford to wait out the economic cycle and the markets’ recovery.  Public companies do not have that luxury and once you go that route, you’re there and and your options can be quite limited, unless you want to go back to being private, which is a completely different situation. 

Ultimately, the nature of growth in the venture capital markets is not surprising and I believe we will continue to see steady increases in activity and assets allocated to this space.  Will the growth be like it was from 1995 to 2000?  Likely not.  However, I believe we have reached a point in the private equity markets where venture capital investors will experience growth going forward that is more akin to what buyout firms have experienced in the past twenty or so years.

As you may recall, I penned an introduction earlier this week to some research that I am conducting on using the yield curve to forecast recession.  I concluded that based on yield curve data and using the yield curve spread model introduced by Estrella and Mishkin (1996), there is approximately a 25-30% probability that the U.S. will be in a recession by mid-2009. 

Today, Fed Chairman Ben Bernanke told the Senate Banking Committee that “the U.S. economy faces ’numerous difficulties,’” according to the Wall Street Journal (subscription required). 

Mr. Bernanke started his testimony by outlining a long list of downside economic risks, including “ongoing” financial stress, falling home prices, a weaker jobs market and rising food and energy prices. Even though Fed officials marked up their 2008 growth forecasts, reflecting better-than-expected growth in the first half of the year, Mr. Bernanke said officials expect that “output would expand at a pace appreciably below its trend rate.” Housing is expected to remain weak, he said, while business and consumer spending should be restrained.

Mr. Bernanke stated that the Fed’s top priority right now will be “Helping the financial markets to return to more normal functioning will continue to be a top priority of the Federal Reserve,” in addition to the Fed’s other responsibilities pertaining to the influence of monetary and fiscal policy that will help the economy as it is negotiating these challenges.  These comments come just days after the Fed intervened to rescue Fannie Mae and Freddie Mac, the troubled GSE’s that are crumbling in the wake of the housing crisis.  The GSEs weren’t the only financial entities to be rescued in the last few days … the FDIC took control of IndyMac, a small bank that opened it’s doors under government management yesterday.  Needless to say, the markets are not reacting well to these statements or chain of events. 

I believe these events are not surprising, and indeed are very telling, in terms of the likelihood that the U.S. will actually enter a recession.  This is also very important, because as I previously argued, we are not experiencing a recession yet, despite what many market commentators and pundits have said. 

So, how will this recent news tie into the evolution of a possible recession?  Well, first of all, I believe Bernanke’s recent comments and the recent chain of events in the banking sector are increasing the probability that an actual recession will occur.  I also believe we are speeding up the pace and nearing a true recession.  In my previous article, I stated that we will likely experience more positive economic growth in Q3, but Q408 could be a different story.  This is just me speculating, but I am beginning to believe this more and more with each day that comments like those today from Bernanke are being made. 

What does this mean for the markets?  Of course, this is the $64,000 question, which involves much more speculation.  However, the simple answer is that this is not good.  Big shocker there, right?  But let’s walk through this and tie it back to the events unraveling over the last twelve months. 

Many investors, policymakers and industry stakeholders have been speaking for months now as if we are in a recession.  This assumption became commonplace throughout the first two quarters of 2008, despite Bernanke and other economists saying this technically is not true.  What has happened is that many of these people have assumed we were reaching a bottom in the marketplace and that we’re now at a point to start coming out of the alleged recession.  However, if we’re not actually in a recession, then we can’t exactly come out of anything and it’s much more likely that we have not hit a bottom in the markets, because if and when we actually do enter into a recession, the markets will most likely continue to experience declines, in addition to more firms shutting their doors and financial firms seeking liquidity from regulators.  This is a bad recipe, yet we haven’t even started on mixing any ingredients.  In fact, we’re still figuring out what all the ingredients are. 

This is not a very positive outlook and I am even getting frustrated with myself by the doom-and-gloom tone of what I am arguing here; however, it’s hard to be positive when every day there is a new piece of negative news locking-up any sense of recovery for a while longer.  With that said, however, I think Art Cashin, the Director of Floor Operations for UBS at the NYSE, was spot-on when he illuded to the fact that we often times have a tendency to get an “it’s the end of the world” attitude, but while a lot of the macro data isn’t pretty, there is also still some pretty good market data that still gives some things about which we can be positive. 

“I still hope to see a real shock,” Cashin said. “For all the visions of the end of the world that we see, stocks are down but they really haven’t capitulated into great anxiety.” (CNBC)

I think we’ve reached the point where even the most optimistic bulls are feeling a little negative with the state of these markets, but this is fine, because we have to reach that point, in order to recover.  Are we not far from a bottom in the markets, as Cashin has said for a couple of weeks now?  I’m not that optimistic, because I think there is still a ways to go, primarily in regards to macroeconomic variables; however, I do believe talk of recover is not inappropriate by any means.